Wednesday, August 13, 2014

Valeant Pharmaceuticals part XI: Less luscious lips

I find it increasingly difficult to work out Valeant's revenue numbers and their implications. Simple maths keeps bringing out astounding factoids. Again I am harping back to the sale of the Facial Injectables/Aesthetics franchise to Galderma. Again I am quoting Michael Pearson (the CEO) on the conference call:

On the aesthetics side, we recently sold certain facial injectable products to Galderma for approximately $1.4 billion, for a gain of over $300 million. We are pleased to report that under Valeant's ownership, we accelerated the sales performance of the Medicis aesthetics assets through Q1 of this year compared to the performance under previous Medicis ownership. In April, we announced our offer for Allergan and publicly stated that we would be divesting these aesthetics products.

As expected, the aesthetics business deteriorated in Q2. The physicians were confused as to what products we wanted them to buy: our legacy Medicis products or our soon-to-have Allergan products. The uncertain status of our MVP Program also created concern for the doctors. Our reps and management were focused on pleasing their new owners and holding back sales until they worked for the new company, and our competitors were discounting heavily and is proportionately trying to take a temporary share to demonstrate weakness in our business.

As a result, our sales dropped approximately 40% in Q2. Fortunately, these assets are now safely in Galderma's hands, and we can now focus on the rest of our business.

Okay, so what we are being told is that the Facial Injectables business had sales growth all the way through Q1 of 2014 - and presumably was also doing pretty well in the second quarter until Valeant announced that they were buying Allergan.

Then presumably they fell off further when they announced that they were selling the unit to Nestle/Galderma.

There is only one problem here: dates.

The (unsolicited) offer for Allergan almost a quarter of the way through the quarter. The deal selling the fillers business was announced two thirds of the way through the quarter.

If you assume the drop happened over these announcements the actual drop had to be enormous - well over fifty percent.

I see two possibilities.

(a) the procedures didn't happen, or

(b) the procedures happened but using some other company's fillers.

And for (a) to be true the doctors had to forgo the income and throughout America and Canada - women will have more wrinkles and less luscious lips because they suddenly stopped using Restylane, Perlane and Emervel injectable cosmetic treatments - and all because of the machinations in Corporate America.

And for (b) to be true doctors need to know and care who is the provider of the injectables they use. This seems unlikely because the websites (typical example linked) are labelled Medicis not Valeant and have been for some time.

Valeant states that the competitors discounted during the quarter. However the main competitor is Juvederm owned by Allergan - and they reported revenue growth driven by unit volume. There is no indication of discounting.

8 comments:

Anonymous
said...

John, when Allergan says their revenue growth was achieved by volume and not price, that does not imply that price discounting was not employed. It means that they did not use price increases to achieve the growth (which they've been claiming Valeant engages in shortly after making an acquisition, as a way to show revenue growth, which is unsustainable when they lap the acquisition). If prices declined and revenue grew, then it obviously implies the growth was volume driven and not price driven.

"If prices declined and revenue grew, then it obviously implies the growth was volume driven and not price driven."

Read that out loud to yourself. By that logic, revenue can never grow by price cuts.

I think you are saying, revs = p*q, and if revs are up and p is down, by golly q has to be up!

Well yes. But, what is at the core here is why q has gone up. Did it go up BECAUSE p went down (price elasticity - this is a move along the demand curve) Or did q go up because they have a new competitive advantage, i.e. their competitor stopped shipping product (a parallel shift out of the demand curve for their product).

Your entire argument seems to be predicated on price and demand being independent?

"Valeant states that the competitors discounted during the quarter. However the main competitor is Juvederm owned by Allergan - and they reported revenue growth driven by unit volume. There is no indication of discounting."

You can have revenue growth driven by volume growth (as Allergan management has stated was the case). But that alone does not preclude price discounting as the driver for the volume growth.

"Read that out loud to yourself. By that logic, revenue can never grow by price cuts."

Revenue can certainly grow when prices fall. The statement itself (" If prices declined and revenue grew") holds this to be true. No where was it stated that the two cannot simultaneously occur.

If prices fall and revenue grew (certainly something that can and does happen), then QUANTITY clearly must have grown MORE than prices FELL. Thus, one can interpret the revenue GROWTH to have been driven by the volume GROWTH and not by price GROWTH (because prices have declined).

If you have been following the narrative of Allergan management, they have accused Valeant of acquiring companies and increasing prices to show organic revenue growth at the new companies (while their market share has actually fallen). They claim this to be unsustainable and they claim that Valeant must acquire new companies continuously, so when they lap the purchase of prior acquisitions, they can mask their inability to maintain the organic growth at those companies by pulling off the same price-increase trick at the new company (and thus continuing to show organic growth on a total company basis, which they can do given they don't breakout product lines).

I am not refuting Allergan's claims. All that I am saying is that per Allergan management's use of the 'price vs. volume' debate, when they are describing the driver of revenue growth, they are referring to the fact that it was volumes that grew and not pricing. Hence, if their facial injectables revenue growth, per management's own commentary, grew by volume - that statement does not imply that they also did not cut price.

All this aside, VRX is acknolwedged to have the best tax structure in the industry. It is a 53bn ev company. Pfizer is $183bn while Astra Zeneca is $90bn. Whatever your views on Ackman/Pearson, they do like to make money. The value of a tax shield to Pfizer potentially outweighs poor, underlying fundamentals. You could be right on everything about the company and completely wrong on the stock. There is an exit plan for VRX should all this go haywire.

The problem with VRX's tax rate is that it is not sustainable at current levels. Their tax rate has been kept at mid-single digit by accelerated amortization of intangibles and interest, both of which rely on further acquisitions. If you look at their amortization schedule, they literally accelerate amortization by reducing the useful life span of intangibles every year.

Also, regarding the sale of the injectables, Pearson said at the time of the sale that they sold it for more than 5x sales. Now 5x sales implies about $280mm of revenue a year, how do you lose $230mm in second half of the year? And didn't he also say that for those assets they do the most sales in second quarter? Am I the only one who thinks this is so blatant that it's ridiculous???

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